For most San Franciscans, Swiss bank accounts are nothing more than a movie plot device—a place for a James Bond or a Jason Bourne to store funds and other information in absolute secrecy.
However, for those U.S. taxpayers with a foreign account they never disclosed through the annual Foreign Bank Account Report (FBAR), these are nervous times indeed.
The Hunt for Revenue
The U.S. government, in a search for more tax dollars, has decided that undeclared foreign bank accounts are a major tool for tax evasion. The U.S. taxpayer with a hidden offshore account earns money invisibly (through interest, dividends, and capital gains) without paying the tax that would apply if the same money was held in a U.S. account. In its revenue-starved state, the U.S. has made a priority of uncovering undisclosed offshore bank accounts held by its taxpayers and has been willing to apply international diplomatic pressure to erode international banking secrecy. The U.S. saw success from these efforts beginning in 2009 when international banking giants such as UBS turned over information. Bankers and clients went to prison, and the U.S. has recovered hundreds of millions of dollars in revenue from that bank alone.
As U.S. pressure shifts from the largest institutions such as UBS to targets of all sizes around the globe, U.S. holders of undisclosed foreign accounts confront a tough choice: come forward or try to stay one step ahead of increasingly aggressive and effective American enforcement.
Since 2009, the Internal Revenue Service has offered U.S. taxpayers the opportunity to make a “voluntary disclosure” of their undeclared offshore accounts. The standard Offshore Voluntary Disclosure Program (OVDP) participant must:
• File amended returns and pay the unpaid tax from the last eight years
• Pay interest on that unpaid tax
• Pay a penalty equal to (typically) 20 percent of the unpaid tax, and—
• Pay a special penalty equal to 27.5 percent of the account’s highest balance in the last eight years.
If this sounds like a punishing financial outcome, it usually is. The typical voluntary disclosure will result in paying out at least half the money in the account. Some lose all the money, and some truly unlucky individuals owe more than the amount left in the account.
Civil Risks: Enormous Tax Bills
If the IRS finds you first, they’ll want:
• The unpaid tax from at least the last six years (and more if your offshore account is older)
• Interest on that unpaid tax
• An accuracy-related penalty equal to 20 to 40 percent of the unpaid tax
• Potential failure-to-file and failure-to-pay penalties, each up to 25 percent of the unpaid tax
• A fraud penalty equal to 75 percent of the unpaid tax, and
• A penalty equal to 50 percent of the account’s highest balance, for each of the past six years.
Consider a U.S. taxpayer who took deliberate steps to hide his $5 million dollar offshore account that he opened six years ago, and which pays $100,000 of annual taxable capital gains income. When discovered, he’ll face a tax bill computed as follows:
• $210,000 in total unpaid tax over the last six years (assuming a 35 percent federal rate)
• $45,000 (as a conservative estimate for six years of accrued interest on the $210,000 in unpaid tax)
• $42,000 from the lower 20 percent accuracy-related penalty
• $52,500 (as a rough estimate of six years of accrued failure-to-pay penalties)
• $157,500 from the special 75 percent penalty for willful evasion
• $15 million penalty, equal to $2.5 million penalty annually for six years.
In short, if our taxpayer waits until the account is discovered, the IRS will happily bankrupt him or collect a full $15,507,000.
Criminal Risks: Federal Imprisonment
If you willfully evaded taxes, you’re also exposed to prosecution for criminal tax evasion. That prosecution, if successful, could put you in federal prison for years.
What are your chances against the U.S. Department of Justice in a courtroom setting? Not good. The Tax Division wins 90 percent of the cases it brings to trial. Perhaps you’ll be part of that lucky 10 percent, but IRS asset freezes or seizures are a possibility. Can you afford the best possible defense attorney when you have no money to pay?
Making the Decision to Disclose
Banking secrecy is under pressure from all sides. Beginning this year, a far-reaching piece of U.S. legislation called FATCA (Foreign Account Tax Compliance Act) will induce every legitimate international banking institution to share records with the U.S.
Prison is filled with individuals who thought they’d committed the perfect crime. You might believe no account paperwork or records carry your name or address. But what about the bankers who took your calls or saw you during visits—do you think they’ll go to prison to protect you?
So ask yourself again: are you truly certain that you and your money can stay one step ahead of the authorities forever? In five years, will any bank in the world still accept your funds? And if not, will voluntary disclosure still be available?
Whether you intentionally maintained an undisclosed foreign account, or simply did not know of your obligation to file an annual FBAR, you have significant financial and criminal exposure.
Seeking advice from a tax specialist is an excellent idea. However, consultation with an accountant risks disaster: not only are your discussions not protected by the strong attorney-client privilege, but accountants are also not qualified to address the criminal aspects of your case. Instead, seek advice from an experienced local tax attorney.
Attorney Andrew L. Jones practices tax law, business law, and estate planning in San Francisco. (This article is intended to provide general information and should not be considered legal, tax, or financial advice.)